Today's federal budget was somewhat anti-climactic. Many expected the Tories to start letting investors defer tax on capital gains. That didn't happen.
What did happen was a nice little perk for savers and home buyers: the new Tax-Free Savings Account (TFSA).
When the TFSA takes effect in 2009 it will offer a brand new way to save (including saving for a down payment). It works like this. You fund the TFSA with after-tax money. Thereafter your money grows, and can be withdrawn, tax-free. In addition, if you take money out of the TFSA you can add it back later without penalty.
From a home buying perspective, this new program raises one question right off the bat: How does it compare to the existing RRSP Home Buyers Plan (HBP)?
Here's a basic overview of each.
| RRSP Home Buyers Plan | Tax-free Savings Account | |
| Availability | First-time buyers | Everyone |
| Money Taxed | Upon withdrawal from RRSP* | Before depositing into TFSA |
| Withdrawals | Must be paid back | No Need to Repay |
| Tax Deductible Deposits | Yes | No |
| Maximum Annual Deposit (for 2008) | $20,000 (max. 19% of your income) | $5,000 |
| Maximum Withdrawal | $20,000 | Unlimited |
* Money withdrawn under the Home Buyers Plan is tax free if repaid in 15 equal yearly installments. Money withdrawn from an RRSP for most other purposes is taxable at that time.
If you're a first-time homebuyer saving for a down payment, you might be better off contributing to your RRSP first. The upfront tax deduction is usually far more beneficial.
Of course you can also use the TFSA. In four years, by using both vehicles, you could theoretically save up to $40,000+ for a down payment, and avoid some taxes to boot.
(The TFSA is a brand new program and we're still getting information on it. If anyone has addition thoughts or viewpoints please let us know in the comments. Also make sure to speak to a licensed financial/tax advisor to confirm all of the above.)
I would be curious to know which savings account you can use. Can you use a high interest savings account or is it only a regular savings account. If it is a high interest savings account then it might be useful...otherwise it would be a complete waste of time.
Posted by: Ryan | February 27, 2008 at 06:15 AM
"A TFSA will generally be permitted to hold the same investments as a Registered Retirement Savings Plan (RRSP)."
from the GovCan Budget website...you can't be all that curious.
Posted by: Ritchie Simpson | February 27, 2008 at 07:36 AM
Actually I am very curious...just lazy ;)
Thx for doing the leg work.
Posted by: Ryan | February 27, 2008 at 11:54 AM
FYI, TFSA is not yet available in 2008.
Posted by: sundae1888 | February 27, 2008 at 11:38 PM
In the chart above under the Home Buyer Plan it says there is tax on withdrawal, but there is not. The home buyer plan avoids paying taxes on RRSP withdrawals unless you don't repay 1/15th of the amount each year.
Posted by: Traciatim | February 28, 2008 at 03:48 AM
Hi Sundae, Right you are. As per our story, the TFSA takes effect in 2009.
Hi Traciatim, Appreciate the feedback. The intended meaning was that RRSP money is taxable upon withdrawal. However, we've reworded it now so that it's clear that HBP withdrawals are exempt from tax if repaid properly. Thanks for highlighting this potential area of confusion.
Cheers,
Rob
Posted by: Canadian Mortgage | February 28, 2008 at 06:12 AM